Problem 1 Two options need to be analyzed using internal rate of return with a MARR of 9% to determine the cost effective solution. Both options have a lifespan of 10 years. Based on the provided data, determine the IROR and most cost effective solution. Option A: Initial Cost: $500,000 Annual 0&M: $65,000 that increases $7,000 per year Maintenance at year 6: $85,000 Annual Revenue: $130,000 that increases $10,000 per year Salvage Value: $205,000 Option B: Initial Cost: $675,000 Annual 0&M: $50,000 that increases $8,000 per year Maintenance at year 7: $98,000 Annual Revenue: $150,000 that increases $7,500 per year Salvage Value: $310,000

Problem 1 Two options need to be analyzed using internal rate of return with a MARR of 9% to determine the cost effective solution. Both options have a lifespan of 10 years. Based on the provided data, determine the IROR and most cost effective solution. Option A: Initial Cost: $500,000 Annual 0&M: $65,000 that increases $7,000 per year Maintenance at year 6: $85,000 Annual Revenue: $130,000 that increases $10,000 per year Salvage Value: $205,000 Option B: Initial Cost: $675,000 Annual 0&M: $50,000 that increases $8,000 per year Maintenance at year 7: $98,000 Annual Revenue: $150,000 that increases $7,500 per year Salvage Value: $310,000

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Problem 1
Two options need to be analyzed using internal rate of return with a MARR of 9% to determine
the cost effective solution. Both options have a lifespan of 10 years. Based on the provided
data, determine the IROR and most cost effective solution.
Option A:
Initial Cost: $500,000
Annual 0&M: $65,000 that increases $7,000 per year
Maintenance at year 6: $85,000
Annual Revenue: $130,000 that increases $10,000 per year
Salvage Value: $205,000
Option B:
Initial Cost: $675,000
Annual 0&M: $50,000 that increases $8,000 per year
Maintenance at year 7: $98,000
Annual Revenue: $150,000 that increases $7,500 per year
Salvage Value: $310,000

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Revenues generated by a new fad product are forecast as follows: Year 1 2 3 4 Revenues $66,973 40,000 20,000 10,000 Thereafter O Expenses are expected to be 50% of revenues, and working capital required in each year is expected to be 20% of revenues in the following year. The product requires an immediate investment of $40,000 in plant and equipment that will be depreciated using the straight-line method over 5 years. The firm recently spent $2,000 on a study to estimate the revenues of the new product. The tax rate is 20%. What is the operating cash flow in year 1? Answer to nearest whole dollar amount.